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Jake's View
PUBLISHED : Sunday, 27 October, 2013, 4:59am
UPDATED : Sunday, 27 October, 2013, 4:59am

Charles Li Xiaojia's quixotic quest for the Holy Grail of preferential control

There appears to be movement on Hong Kong's side, too, with Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia saying in his blog yesterday that consideration should be given to "non-standard shareholding structures" for innovative companies.

SCMP, October 25

When this monkey business of preferential control over a listed company was last rebuffed by the stock exchange 25 years ago, the wags had it that all questions of democracy in Hong Kong had finally been settled. 'A' shares would have the same voting rights as 'B' shares.

To the accompaniment of a few hoots of laughter, the Jardines empire then slunk off to Singapore. The Keswick family, with an estimated 8 per cent shareholding, had sought to give itself absolute control of the company with preferential 'B' shares. Singapore said, "Yes, yes, yes." That's Singapore for you.

The approach has been a little different with mainland middleman website Alibaba.com. It similarly seeks to guarantee control by founder Jack Ma Yun and some associates, although they will only have a minority holding of the shares. They seek to do it, however, through a "partnership" arrangement. I'm not sure exactly what this means (I'm not sure anyone is) but it appears to involve one group of people having the perpetual right to appoint the majority of the board.

Off to Singapore with you, we said, or, in this case, off to New York where we are told that the online stock exchange, Nasdaq, has agreed.

But Alibaba now says it is in no hurry. Apparently it still prefers the Hong Kong listing, which I can understand. Trading volumes in New York would probably soon wither. New York's standards are low and people are starting to realise it.

And now Charles Li is having second thoughts, too. He is not quite saying, "Come back, Alibaba", but on his blog he is wavering: "What's lost in the debate is whether Hong Kong should embrace new, innovative companies and, if so, how. Losing one or two listing candidates is not a big deal for Hong Kong, but losing a generation of companies from China's new economy is."

And then he says: "The key is to find the right balance between the concessions allowed to founders and the strength and effectiveness of the counter-measures available to public shareholders in the event of disagreement or conflict."

Yes, let's go in search of the Holy Grail. I think he has an impossible task in front of him. In the first place, how are we to define an innovative company? I have yet to find a corporate executive who will openly declare, "I'm a bore. I'm not interested in finding ways of doing things better."

I hazard a guess that what Mr Li means by "innovative" is fancy electronics. It's a common definition. It's also a false one. The business of a good number of these supposedly hi-tech companies consists of little more than leasing precision digital machinery from Germany or Korea and following operating instructions to the letter. What innovation?

I am also not convinced that these "innovators" are naturally the best people to lead a company. I think they are mostly not. They are often obsessed with their technologies to the detriment of returns on capital. If you approve of this, I challenge you to invest your pension money in this sort of company.

Yes, it is true that the founders of many start-ups surrender most of their ownership to venture capitalists. That's the cost of money, I'm afraid, and I would hate to see our stock exchange wreck itself by trying to dissolve such a fundament of human commercial relations.

The fact is that principles of how best to establish a joint stock company have evolved over hundreds of years and Charles Li will find no way of bettering them.

What you do is divide the capital into shares with equal break-up and voting rights. If you want absolute control of the company, make sure you have more that 50 per cent of the shares. If you otherwise want to stay boss, make sure you run the company so well that no-one would think of throwing you out.

And don't insult your shareholders with overuse of the word "innovation".

jake.vanderkamp@scmp.com

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singleline
According to Winston Churchill, democracy is the best form of government. But populism as a byproduct demands wealth redistribution from the rich and the future generation to the present poor. According to Voltaire, the best form of government is a benevolent tyranny tempered by an occasional assassination. As a shareholder I don’t care whether Jack Ma is a benevolent tyrant or not. I just want another TenCent! After Alibaba’s listing, the share price will have a discount which reflects the company’s ‘peculiar’ requirement. Afterall, no one will dislike a sale of 30% off (not to mention the buyers’ surplus)! Caveat Emptor.
Without creative destruction, no progress can be made. So, Charles Li, go ahead, start the consultation as fast as you can, and break the tyranny of the status quote (also a form of innovation).
singleline
Jake, do you know how difficult it is to start and run a successful high-tech internet company? Because of survivor bias, we just see one sucessful company that survivies, without seeing at the same time the hundreds of similar startups that had gone extinct. One more successful innovative company means one more important innovative product or service. I think you are using a word processor to write the article above. That’s a product of innovation. The browser I am now using is a product of innovation. Will you forsake using your car? Your iphone? Your TV? Your house? Your clothes? They are all products of important past innovations! Don’t you want to wear the coming Google watch? Innovation is dead important. Why shouldn’t we encourage more of them? Consumers get most of the benefits of innovation, not the shareholders of the innovative companies (of course shareholders are also consumers).
Anyone who is not convinced of the importance of high-tech innovation should read the book ‘Unintended Consequences, why everything you’ve been told about the economy is wrong’ by Edward Conard. You may not agree with the author, but you’ll get the point. (No advertisement intended, I don’t know the author).
Fairness is a valuable principle. But the principle ‘from each according to his ability, to each according to his need’ is also very fair. You know the consequences.
JC
ho ho ho. Our Santa Claus Jake is out to rub Singapore down again. As if the HKex is so high and mighty in protecting the rights of minority shareholders and never ever bending backwards to score a deal. I always thought that it would never allow companies in the red to list, until Rusal came along. So Jake, please stick your so called principles up your ****. They fit snugly. The amount of backroom dealings and cross-shareholdings by the local tycoons over the years are enough to send mother christopher to the brothel. So much for your highfalutin morality speech. So please laugh as loud as you can muster. The fact of the matter is that HK is now only the international financial hub for China today. Still very important, but just China. Soon, it's going to be just the Pearl River Delta. So please indulge in your grand delusion before you get older than you already are and wither away. Btw, what are the daily trading volumes on the HKex compared to NYSE or Nasdaq. Do you know the daily trading volumes of shares like Baidu. Ho Ho Ho, we are dealing with a really bitter Santa who is finding it difficult to come to grasp with the reality of competition. But don't worry, where you were once the colonial outpost of the UK, and hence the hub of Western interests during the Cold War, you now have Beijing as your sugar mummy to spoonfeed you with more listing of dubious SOEs from the mainland. Once a mummy's boy, always a mummy's boy. That's very high standards for you
Will.I.Am
What do you expect from Jackie Chan? Lol.
XYZ
I guess those anger management sessions didn't work out very well.
anotherguy
ho hee ho, JC again. Sucking up to Singapore again....typical of u, what can anyone else say?
JC
say what you want anotherguy. but at least say something constructive for crying out loud. I am not sucking up to Singapore simply because I am a Singaporean. What about you? A Hongkie sucking up to a Canadian Dutch/HK PR with an axe to grind? Grow up mate. Jake van der Kamp's article has been filled with put downs and virtrol towards the city-state over the years. It's time he moves on and lives in the present and the future, not in the past. Very unfortunate that this is the standard of journalism from the city of so-called "free media". Yes, I'm sure you know-it-alls and high and mighty in Hong Kong manage your growing angst very well, like all those silly protests and pecadilloes in your city. Wow! Please don't make me LOL mates

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